We examine the argument of the Financial Supervisory Service that the behavior of the Individual Investors to buy an out-of-the-money option is excessively speculative. The FSS reported that the individual investors incurred huge losses in the trading of KOSPI200 index options for the years 2002 and 2003. But since the sample period is relatively short, the argument does not seem fully convincing. Using a longer period data from July 1997 to December 2003, we reconfirm the huge losses of the Individual investors and also find that a tendency of individual investors losing money in association with option trading perSisted during the longer period. The individual investors chose out-of-the money options with short time to maturity, that are cheap and thus are expected to make huge profits with very low probabilities. Finally, we tind that out-ot-the money options with short time to maturity turn out to be in general priced higher than what the Korea Stock Exchange model suggests.
The practice of purchasing out-of-the-money options for the reason of cheap prices and huge profit possibilities can be regarded as being excessively speculative. Due to overpricing, the individual investors persistently incurred some losses.
Index Option Pricing Models with Stochastic Volatility and Stochastic Interest Rates
